RBI to cut down ‘pre-emptions’ to spur efficiency

Mumbai: A day after he lowered SLR, the mandatory government bond holding requirements for banks, Reserve Bank Governor Raghuram Rajan on Wednesday said RBI is all for reducing ‘pre-emptions’ over a longer horizon for more efficiency in the financial system.

"The broader, longer term programme of five years, is that we should reduce the amount of pre-emptions we have in the system including SLR and make a more effective priority sector lending (PSL) process," Rajan said during the customary post-policy call with analysts.

Rajan drew attention towards the Nachiket Mor committee on PSL and said that the RBI is trying to make the entire process more effective.

"These are necessary changes in the system and should not be seen as tied to the monetary cycles," he added.

Various stakeholders in the system, including the banks, have been expressing reservations about the pre-emptions like the SLR and CRR. In the present scenario, banks have to set invest 22 percent of their deposits in government securities and 4 percent gets parked as cash reserve ratio without any interest payment.

Banks carry out lending on whatever remains, and 40 percent of the lending as well is mandated to be done to weaker sections of the society under the PSL.

Rajan conceded that yesterday's 0.50 percent cut in Statutory Liquidity Ratio is not going to have any real impact in the immediate future and added that banks will continue carrying excess SLR for the ‘foreseeable future’.

The cut in the SLR holding requirement, which has the potential to release an additional Rs 40,000 crore into the system, offers banks the flexibility to manage their finances better when the credit demand will go up, he said.

"Going forward, we would investigate the conditions in both the credit market as well as the bond market and make appropriate decisions at that point," Rajan said, asserting that banks will continue to be present in the government securities market.

When asked about the limit for foreign institutional investors' investments in government securities, Rajan said the RBI is happy with their renewed interest and also acknowledged their preference for longer maturity debt of over three years.

The situation is not such at present wherein foreign investors have come close to breaching the limits on G-Sec investments and as and when the limits are closer to be exhausted, the RBI may look at relaxing them, Rajan said.

He stressed that the central bank is not averse to the idea of such a relaxation.

Rajan added that with the maturity in the Indian markets, many domestic institutions beyond banks like domestic institutional investors, pension funds and insurance companies will look at deploying their money in this market.

He also stressed upon the need for getting more participation from the retail investors in the G-Sec market.

On the stance of the monetary policy in the days ahead, Rajan said the primary objective of the RBI is to ensure that the economy disinflates as per a glided path announced earlier under which it wants to reduce the headline retail inflation to 8 percent by January 2015 and narrow it further to 6 percent by January 2016.

Stating that at present the RBI considers the economy on course of its expectations, Rajan said the RBI will cut rates if the inflation is faster than expected to boost growth, but will not be averse to hiking rates should the price-rise fasten.

At present, the outlook on inflation hinges on the movement of the monsoon with regard to the impact on the commodity prices and also on supply side measures undertaken by the government, he said.

The economy has disinflated ‘considerably’ but it is too early to consider victory as RBI has not been able to get a good hold over people's inflationary expectations, he said.

In the surveys, people's responses also talk of hyper- inflation, he said, clarifying that the policy will be driven more by actual inflation on the ground rather than the expectations pronounced in the surveys.

When asked about a possible rate hike by the US Fed and the RBI's response in such a situation, Rajan said that RBI's action on the rates will be determined by domestic conditions and not by any interest rate differentials between the developed world and the country.

Rajan also stressed that "we are in the positive real interest rate territory, and we are at par with the developed world on this".

After the RBI cut the hold-to-maturity (HTM) limits for banks yesterday to help tide over any liquidity troubles, Rajan said there is no predetermined path with which the central bank is working.

On the liquidity management front, he acknowledged that there has been some volatility in the recent past, saying that RBI will soon come up with some measures to reduce it.

RBI Deputy Governor HR Khan said the government has some reservations about disclosing its balances with the central bank to the public.

The Reserve Bank, he added, is in discussions with the government to get to know the balances in real time.